Indofood International Finance Ltd v JP Morgan Chase Bank N.A. London Branch

Whether a contractual tax-saving measure is “available” must first be determined on the ordinary civil standard of proof. If available, its reasonableness requires consideration of all relevant legal and commercial risks, not merely a cost-benefit comparison. Under a double tax agreement, a conduit company that is contractually bound to pass interest payments through to noteholders will not ordinarily be the beneficial owner of that interest. The substance of the arrangement is decisive. A company’s formal incorporation and board structure do not necessarily establish residence where the key commercial decisions are made elsewhere.

The appellant issued loan notes through a Mauritian subsidiary to obtain reduced Indonesian withholding tax under the Indonesia-Mauritius double tax agreement. After Indonesia terminated that agreement, the appellant sought to redeem the notes under a condition permitting early redemption where the increased tax burden could not be avoided by reasonable available measures.

The High Court held that the relevant test was reasonable certainty and found that interposing a Netherlands company could satisfy the Indonesia-Netherlands double tax agreement. The appellant appealed on the substantive issues, while the trustee challenged the reasonable-certainty test. The central questions were whether the proposed restructuring was available and reasonable.

Appeal allowed. The Court of Appeal held as follows.

1. The question whether a measure was available to avoid withholding tax had to be determined on the balance of probabilities. If a measure was available, its reasonableness required an assessment of all legal and commercial risks. That inquiry was distinct from the question of availability and was not confined to comparative cost (per the Chancellor, paras [27]-[28]).
2. Newco could not be regarded as the beneficial owner of the interest for the purposes of article 11.2 of the Indonesia-Netherlands double tax agreement. The phrase had an international fiscal meaning and required consideration of the substance of the arrangement. Newco would be bound, in commercial and practical terms, to pass on the interest received. It would therefore have only the position of an administrator or conduit and would lack the full privilege to benefit directly from the income (paras [41]-[47]). Chadwick LJ and Sir Peter Gibson agreed with this ground (paras [70], [77]).
3. The fact that the Indonesian authorities had not previously challenged the Mauritian arrangements did not establish how the Indonesian Tax Court would determine the proposed arrangement. The later circular and correspondence showed a declared policy against treaty shopping through conduit companies (paras [46], [71]-[74]).
4. The Chancellor additionally concluded that Newco’s place of effective management would be Indonesia because the key decisions concerning the interposition and terms of the arrangement would be made by the Parent Guarantor. Chadwick LJ and Sir Peter Gibson preferred not to decide that issue, so it did not form part of the necessary common basis of decision (paras [50]-[59], [75], [77]).
5. For completeness, the Chancellor considered that the proposed contractual amendments would not necessarily novate the original loan, and that investigation and litigation costs should not be brought into account when assessing the reasonableness of implementing an assumed available measure (paras [60]-[68]).

The appellant had established that there was no bar to early redemption under condition 6(b) of the loan notes.

• High Court of Justice, Chancery Division: Evans-Lombe J held that the test was one of reasonable certainty and concluded that the proposed Netherlands restructuring could satisfy the relevant double tax agreement requirements.
• Court of Appeal (Civil Division): The appeal was allowed. The court held that the measure was unavailable because Newco could not be the beneficial owner of the interest, and the appellant had therefore satisfied condition 6(b).